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August 3, 2011 Dear Friend,
The attached report "previews" the
Century Aluminum conference call tomorrow evening at 5 pm after they report
earnings at the close (dial 800 230 1059 with NO pass code). We are not
concerned about the $12 mm extra startup loss to be incurred in the June
quarter, or how we revise our 2011 earnings estimates. We do not expect to
make any changes to our $1.20 2012 or $1.40 per lb long-term aluminum price
forecasts or aluminum industry demand-supply model.
There is NOT necessarily any cause for alarm or panic. The longer Century Aluminum spends small amounts on its Helguvik project, the more cash Century retains from current operations. Thus, the "self financing" alternative of earnings retention becomes larger and more practical every day. Second, the WV smelter held idle provides for a tighter global aluminum market, and someday either the power supplier or the union work force may prove more cooperative to a restart on suitable terms. Instead, any revision to our $24 price target and Overweight investment rating will stem from the decisions concerning the 360,000 tonne Helguvik smelter project in Iceland, whose financing and construction are overdue, and the 170,000 idle West Virginia smelter held idle since early 2009. We believe the investment issues involve how much the current active 615,000 tonne capacity increases, and when or whether the company reaches a 1,145,000 tonne output level from three U.S. and two Iceland smelters. If Century Aluminum chooses to sell all or part of either the Helguvik project in Iceland or the West Virginia smelter, clearly a large sales price is better than a small one. We are troubled that the #2 and #3 operating executives departed during the second-quarter, which could be indicative of issues larger than a $12 million inefficiency. Or it just could be a cost savings initiative. We always have had a concern that the Monterrey, California HQ is not physically close to the assets, and we wonder what communications inefficiencies developed. The larger issues are not the Kentucky slow startup, but the delay to finance and start construction in Iceland, how long the government in Iceland continues to allocate future electricity or the project to Century, the controversy in WV concerning the halt to retiree medical benefits and how Century Aluminum realizes value from the idle WV smelter. We think this is a good company, and we are waiting to hear their explanations tomorrow night prior to our making any revisions to our $24 price target, Overweight investment rating, long-term output profile or long-term earnings estimates. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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